SDE add-backs worth questioning
Published November 9, 2026
In short: an add-back is an expense the seller says will not continue under a new owner. Some are routine and easy to prove. Others are guesses. Ask for evidence on each one and only count what you can support.
Usually reasonable, but confirm
- Interest, depreciation and amortization. Standard. Confirm they match the tax return, and remember equipment may still need replacing.
- Owner salary and payroll taxes. Standard for one working owner. Check it against the owner’s actual pay, then subtract what a replacement manager would cost if you will not do the job yourself.
- Owner health insurance and retirement contributions. Ask for the policy and plan documents.
Needs evidence
- Personal vehicle, phone and travel. Ask how much is truly personal. Business use of the same vehicle is a real cost that continues.
- Family members on payroll. Fine to add back only if they do no real work, or if you will replace their duties at market pay. Otherwise it is a cost that continues.
- One-time repairs, legal fees or settlements. Ask what happened and whether similar costs show up in other years.
- Owner meals, entertainment and club dues. Ask how the seller allocates business and personal use.
Needs real skepticism
- “Non-recurring” items that recur. If the same repair or fee appears in several years, it is part of running the business.
- Large unexplained add-backs. Any large item without a document should not be counted until you see support.
- Below-market rent paid to the owner’s own property. If the lease will reset to market rent, your costs go up.
- Add-backs on the P&L that do not appear on the tax return. Compare both for the same year, and ask why they differ.
- Cash or off-book income. A lender will generally rely on documented income, so unreported income is hard to finance and carries its own risks.
A simple rule
Count an add-back only when you have a document that supports it and you agree it will not continue under your ownership. Keep a list of the ones you declined and why, so you can revisit them if the seller produces evidence.
Next: what SDE is and how it differs from EBITDA.
Want this done on a real deal? A Verified SDE Report reconciles the seller’s P&Ls with their tax returns, judges each add-back, and checks debt coverage. See a sample report or get one for $99.
Educational information only, not accounting, tax, legal, lending or investment advice. Check any deal with your own CPA, attorney and lender.